Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for July 16th, 2007

It was a day for remarkable comments by Government officials, proving once again either infinite stupidity or the total absence of scruples by the Chavez administration:

–First there was the President of the National Assembly Cilia Flores who actually said:

“The opposition has issued opinions about Constitutional reform without knowing its content”

Jeez, where should I start on this one. We are supposed to be living in a democracy according to the autocrat/dictator and his cronies. We also have a new Constitution which was supposed to open the country to a new type of more open, transparent and participatory democracy. However, a small circle of people which include only people close to the autocrat/dictator have been discussing a profound modification of the Venezuelan Constitution for six months, but except for scattered leaks, only that small circle actually knows what they are planning in one of the most anti-democratic exrecizes of this blatantly antidemocratic Government. And this stupid lady actually has the nerve to call those that criticize the indefinite reelection proposal ignorant and out of line because of the way the autocracy is being run.

–And then there is the new President of CANTV, who last week, according to today’s Tal Cual said that the company was going to need some US$ 150 million in help from the Government this year.

Now, I would like to understand how a company that had US$ 450 million in cash flow in 2006, which has almost no debt and which distributed, when it was in private hands, over US$ 340 million in dividends in 2006, already needs help from the Government less than two months after being taken over by the Government? Could it be that when the rates were lowered nobody thought of calculating its impact on the company? So, is this what XXIst. century socialism is all about? Take a perfectly working and profitable company and turn it into the same crappy company we had 20 years ago when you would get a dial tine only one out of every three times?

“Who cares if we have the highest inflation in the world, if Venezuelans earn their money here and enjoy the goods here”

This one is a jewel, particularly to a Venezuelan who has no job, earns minimum salary or can hardly make ends meet and whose $2 a day have remained invariable since 1998 when Chavez took over, despite the biggest oil windfall in the history of the country. This without mentioning how this inflation is destroying the country’s industrial base, as the Government imports products from abroad at a pace which this year will be triple of what it was in any year in the 1990’s.

Then he ignores history (or lies, your choice):

“We have to remember that we have had very high inflation rates and we have managed to decelerate it and turn it into the lowest in the last thirty years”

Hello? In the last thirty years there have been 5 years of single digit inflation and not one occurred in the last eight years. Moreover, the lowest inflaton level in the last eight years occurred in 2001 and since then inflation has been out of control, despite huge resources, price controls and exchange controls with the exchange rate at the same rate for the last two and a half years. Inflation may be lower this year than last, but only because a one time artificial drop of five percentage points in the value added tax. Structral inflation not only reamins high, but the inflation felt by the poor, who spend more than 80% of their income on food has been ten points higher than the overall CPI.

“If we did not have price controls, shelves would be full, but people would not be able to buy anything”

Well, I guess is better to have people have money in their pockets and empty shelves, as is happening more and more. Today I could not buy turkey, eggs, chicken, pasta and meat at my supermarket. In any case, a very idiotic statement given what is happening.

Then, when asked what will be done with the Fonden Bolivars that come from selling the structured notes, he said:

“They can be converted to foreign currency to give more liquidity to Fonden”

This statement is sheer and absolute idiocy and deserves a Quico-like diagram to explain it better (which I will do at some point), but here is what this financial genius is proposing in his infinite ignorance:

Fonden buys a structured note at 60% of its face value. It sells it to local banks at 90% of its value but at the official rate of exchange of Bs. 2,150 to the US$ and “makes” a “profit” in US$ of 300 million, such bank turns around and sells the note at 60% of its value (what Fonden actually paid for it), gets the dollars and sells them in the parallel market at Bs. 4,100 per US$, thus making a profit.

So what the genius of Sanguino is proposing is to have Fonden turn around and buy dollars from the Central Bank at Bs. 2,150 per $ and start the virtuous (or is it vicious?) circle again.

Thus, at each cycle, Fonden “makes” and creates money, the private banks make money and the Central Bank loses reserves in this new and revolutionary version of the perpetual motion financial machine.

Amazing, no? I promise to explain it in more detail in the near future.